London (Reuters) – The Turkish lira has dropped another 9 percent this month, and debt market danger gauges are at levels that were last seen during the 2008 global crash. This has made investors worry that a new crisis could be coming to Turkey.
Whether or not President Tayyip Erdogan’s government can stop market turmoil just five months after the last one will have big effect on his chances of being re-elected and on whether or not foreign investors will come back if he loses.
The latest drop in the value of the lira—down 20% this year—combined with rising energy and food prices around the world has caused inflation to reach 70% and keep going up. Emergency measures that Ankara put in place at the height of last year’s turmoil are about to be put to the test.
In December, the government avoided a full-scale collapse by selling off its currency reserves and setting up special bank accounts to protect savers and businesses from big drops in the value of the lira. This was done to discourage people from stockpiling U.S. dollars, euros, or gold.
But these KKM accounts might not be as popular as they used to be as important “rollover” dates for the summer get closer. When FX “swap” deals with Turkey’s own banks are taken into account, the central bank’s net reserves have dropped to a negative $55 billion.
“It’s not a sure thing that Turkey will have a big crisis, but the odds are far from zero,” said abrdn fund manager Kieran Curtis. “They risk not being able to handle the situation.”
Erdogan’s government says that the war in Ukraine has made it harder to balance the country’s current account through a mix of credit, exports, and investments. The central bank says that prices will go down by the end of the year.
Nonetheless, the falling lira, a 50% increase in domestic lending, and sky-high energy and food prices are pushing inflation into the triple digits.But on Thursday, the central bank did not change the rate of interest, which is now 14%.
There are also new worries about Turkey’s tense relationship with the West after Erdogan said he would block Finland and Sweden from joining NATO. He said they were hiding people with ties to illegal Kurdish separatists, which is against the law.
(Graphic: The next 12 years won’t be good for the Turkish lira: http://fingfx.thomsonreuters.com/gfx/mkt/gkplgzjmyvb/Pasted%20image%20201653481936730.png)
TEST SUMMER
Top investment banks in the West are worried that Turkey’s currency reserves will keep falling. Citi thinks that energy and food imports will push the current account gap to 5% of the country’s gross domestic product. However, a rise in tourism should bring in $15–20 billion.
Investors are becoming more interested in whether or not people and businesses will keep using FX-protected KKM accounts.
The government and central bank don’t give out a lot of information about the program. Four Turkish economists did the math for Reuters and found that about $10 billion worth of deposits will be due in July and another $20 billion will be due in August.
Zafar Nazim of JPMorgan (NYSE: JPM) said it is “essential” to keep depositors interested in this scheme, even though real rates are very low. Because of this, Ankara might decide to let companies put more money into KKM accounts and maybe offer new tax breaks. However, some people think that this could cause more problems.
“I don’t think it can keep going.” “You can’t just give money to anyone to protect against a weak currency. “Daniel Moreno, who is in charge of debt in emerging markets at Mirabaud, said that the company sold its last Turkey bonds during last year’s turmoil.
“Things look like they are getting worse every day.” “Turkey won’t give up without a fight, though.“
Turkey’s foreign exchange reserves can be seen in this graph: http://fingfx.thomsonreuters.com/gfx/mkt/gdpzyenbxvw/Pasted%20image%20201653528552503.png.
Election Fever
After Turkey’s problems over the past few years, not many big foreign investors still hold a lot of its bonds. The government has been thinking about FX-protected bonds as a way to turn things around, but money managers are worried that capital controls could trap them at some point.
The market problems have made things worse for regular Turks, and households are having a hard time paying their bills, which are going up quickly. This is setting up an election in June 2023 that could go either way.
Polls show that Erdogan has made up some of the ground he lost over the winter and that his ruling AK Party is still ahead of its competitors. But his popularity is at a level that hasn’t been seen in years, and polls show that he could lose his majority in parliament and maybe even the presidency to an opposition coalition.
Foreign investors say that Erdogan’s departure would be a good sign because it would make it more likely that Turkey would go back to more traditional economic policies.
Petar Atanasov, who works at an emerging market fund called Gramercy, said, “The election will determine whether or not Turkey is a good place to invest.”
Economists say that Erdogan’s loss of investors, especially after the failed coup in 2016, has led to policies that look more inward.
Turkey’s credit rating has dropped, and its weight in the most closely watched local currency emerging market debt index, GBI-EM, has dropped from 10% to 1%.
Atanasov said that most international investors wanted a change in leadership and policy, such as a return to rate hikes, but that Erdogan would do his best to stay in power.
Atanasov said, “The market will be very skeptical until the very end.” “It’s hard to say what will happen in this election because anything could happen.”
